Trade-off analysis: profit vs risk (expected net value with downside)
A firm must choose exactly one project. If the project succeeds, it earns the listed profit. If it fails, it incurs the listed loss (refunds, rework, and penalties).
| Project | Probability of success | Profit if success | Loss if failure |
|---|---|---|---|
| A | 65% | $240,000 | -$120,000 |
| B | 50% | $330,000 | -$60,000 |
| C | 80% | $190,000 | -$40,000 |
Question: If the firm maximizes expected net value, which project should it choose?